Shareholders’ and Unitholders’ Agreements

Thinking of going into business with friends?

The first thing you should do is draw up a shareholders’ or unitholders’ agreement to minimise your business risk, according to Jim Wilson, principal of Wilson Haynes – solicitors, conveyancers and business advisors.

“The biggest risk to mitigate against is the prospect that you and your friends don’t know your roles, entitlements and obligations and end up disagreeing on how the business is to be run,” said Jim. “This will ultimately lead to the financial failure of the business.

“Unfortunately, the first thing most new business people do is to visit their accountant to discuss business structures, tax implications, stock levels, operating margins, cash contributions by each party, cash flow and all the important things that will make the venture worthwhile. They may end up purchasing a company or may be advised to run the business with a company acting as trustee of a unit trust.

“But most accountants and even many lawyers do not bring up the subject of business risk mitigation. This can be fatal for new companies with shareholders.”

The best way to minimise business risk in a company or unit trust situation is have a shareholders’ or unitholders’ agreement drawn up by your solicitor. This will set out:

  • Who will be on the Board and how members will be replaced;
  • How the Board will function;
  • The roles of each shareholder, their remuneration and how this will be reviewed;
  • Who will provide guarantees for working capital and leases;
  • What happens if the business needs more money;
  • What happens if one of your friends can’t contribute any more money;
  • What happens if one of your friends wants to sell out;
  • What restrictions are put on the seller in terms of ability to set up in competition;
  • Can a seller force the other shareholders or unitholders to sell too (called ‘drag along’)?
  • Can a shareholder or unit holder who is offered units for sale, request that his shares or units be part of the sale (called ‘come along’); and
  • Dispute resolution.

“It is important not to spend any money on setting up a business structure until you have a clear understanding between all shareholders or unitholders about the rights, entitlements and obligations of each of you. Always see your solicitor first when thinking about going into business with anyone to discuss how the relationship with your business partners will work and be documented,” said Mr Wilson.

WILSON HAYNES – solicitors, conveyancers and business advisors – provide expert advice on all commercial, property, wills and estates and family matters. For a FREE 30-minute appointment about your legal matter please call 07 5536 3055.

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